Knot Says ECB Rate Cut Remains Option If Inflation Deteriorates

European Central Bank Governing Council member Klaas Knot said interest-rate cuts remain an option if euro-area inflation deteriorates further.

“As far as I am concerned we’re not at zero bound yet and we shouldn’t exclude a negative deposit facility to be part of the possibilities,” Knot said in Amsterdam today. “If new shocks arise which push inflation further down to such a level we’re not comfortable with, then you would look at changing monetary conditions and then you’re looking at the classic lowering of interest rates.”

Euro-area inflation was at 0.8 percent in February, less than half the 2 percent the ECB defines as price stability. The central bank kept its benchmark rate at a record-low 0.25 percent on March 6 and President Mario Draghi has pledged to keep interest rates “at present or lower levels for an extended period of time” to help the economy recover.

Knot said there’s no need for further unconventional measures at this time “as we consider inflationary risks currently to be very limited.”

Should this change “then we need to revisit this again and then distinguish between the need to do something about the monetary stance, monetary conditions or do something about the monetary transmission process,” he said. “Other measures only come into play with other sort of problems and I don’t foresee those at this moment.”

Monetary Stimulus

The ECB should phase out the monetary stimulus it used to boost liquidity only gradually as a premature exit could damage the economy, the Dutch central bank, which Knot heads, said in its annual report published today.

“The enormous amount of liquidity created by the ECB through unconventional measures poses a risk in the long term for price and financial stability,” it said. A potentially too late exit through asset price inflation carries the risk of creating new bubbles, according to the bank. “It’s important not to overuse unconventional monetary measures,” the central bank said.

This could lead to unintended side effects whereby a dominating role of the central bank on the money or capital market could disturb market mechanism and market discipline, according to the central bank.

The pace of the U.S. Federal Reserve Bank’s plan to reduce its stimulus program will most likely determine the sustainability of the global economic recovery, the bank said. “If this succeeds, the impact of less global liquidity on economic growth could be compensated by an acceleration of global trade, caused by a strengthening of global demand,” the bank wrote in its annual report.

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